Oil falls as OPEC yields no surprises

Oil closes up 11%, natural gas down 17% on month

SAN FRANCISCO (MarketWatch) -- Crude-oil futures fell Tuesday to close back under $68 per barrel Tuesday after a meeting of some of the world's key oil producers yielded no surprises, leaving output quotas unchanged.

But prices still scored a more than 11% gain for the month, due in large part to growing tensions surrounding Iran's nuclear program.

"The OPEC meeting contained no major surprises to the energy markets," said Jim Wyckoff, an analyst at online resource TradingEducation.com. Even so, the "decision to leave total OPEC crude oil output unchanged does give the bears some ammunition in the near term."

At the same time, "Iran will also be 'reported' to the Security Council which will not act for a month, while it awaits an IAEA [International Atomic Energy Agency] report, which seems to be a tacit acceptance that Iran essentially holds all the cards in that dispute," John Kilduff, an analyst at Fimat USA, said in a note to clients.

Crude for March delivery fell 43 cents to close at $67.92 a barrel on the New York Mercantile Exchange. It finished Monday at a more than one-week high.

Prices were up $6.88 a barrel, or 11.3%, higher than the month-ago ending level of $61.04 for crude futures.

February unleaded gasoline lost 4.91 cents to end at $1.7258 a gallon and February heating oil fell 3.19 cents to finish at $1.8019 a gallon. Heating oil was up almost 2%, while unleaded gas was nearly flat from a month ago.

March became the lead-month contract at the session's close. March unleaded gasoline closed down 3.7 cents at $1.8051 and March heating oil closed down 1.88 cents at $1.8479.

The Organization of the Petroleum Exporting Countries agreed to leave its output unchanged at 28 million barrels of oil a day, Libyan oil minister Fathi Hamed Ben Shatwan said, according to the Associated Press.

The decision was in line with market expectations following a wide number of comments from OPEC officials over the weekend. Qatari oil minister Abdullah bin Hamad al-Attiyah said a cut in output would be discussed at the March meeting.

"OPEC has done well responding to prices rather than expected inventory builds, and that is likely to continue for now," said Michael Lynch, president of Strategic Energy & Economic Research.

"Even suggesting a cut in production would seem to be an aggressive move, given current near-record prices," he said, "so they will attempt to assure consumers that they are working to reduce them by maintaining production in the face of a potentially large surplus in the second quarter."

Even so, "what's going on behind the scenes doesn't bode well for summertime supply," said veteran commodities trader Kevin Kerr.

Kerr, who also edits Global Resources Trader, a newsletter service of MarketWatch, said he thinks "the cartel plans to tighten the spigot and possibly ratchet up gas prices at the pump this summer as high as $5" a gallon.

Iran tension heats up

Meanwhile, the permanent members of the U.N. council -- the U.S., the United Kingdom, France, Russian and China -- all agreed that the Security Council in March should consider Iran's situation, which could result in punitive action.

Russia surprisingly backed the move after long resisting a referral, though it's unclear whether Russia would back sanctions at the U.N. council.

The Tehran government said a referral to the U.N. Security Council would mean the end of diplomacy. Iran has consistently denied Western claims that it is aiming to create nuclear weapons, arguing that its research is solely aimed at generating energy for civilian purposes.

The oil-market "bears were pleased to hear that Iran's oil minister reportedly said his country had no intentions to reduce oil output anytime soon," said TradingEducation.com's Wyckoff.

He noted, however, that traders were "a bit surprised that Iran was not more inflammatory at the meeting, given the present confrontation over its nuclear ambitions."

U.S. President George Bush is expected to comment on the Iranian nuclear standoff in his State of the Nation address this evening.

Supply data wait

Also on traders' radars Tuesday were expectations for Wednesday's U.S. petroleum inventory updates from the Energy Department and American Petroleum Institute. Most analysts were looking for across-the-board climbs.

The Platts survey also showed market expectations for a climb of 1.3 million barrels for motor gasoline supplies and a rise of 900,000 barrels for distillate stocks, which include heating oil. Fimat is looking for a rise of 1.4 million for gasoline and an 800,000-barrel increase in distillates.

Natural-gas prices down 17% on month

March natural gas closed down 7.3 cents at $9.316 per million British thermal units. It closed Monday at a three-week high. Futures prices closed at $11.225 on Dec. 30, 2005, so they're down 17% from that level.

UBS expects Thursday's weekly report from the Energy Department to show a decline of 80 billion to 90 billion cubic feet for the week ended Jan. 27.

That's well below the decline of 188 billion for the same time a year earlier and the five-year average fall of 172 billion, according to data from the brokerage.

In energy equities Tuesday, benchmarks tracking the oil and gas sectors were mixed, with the Oil Service Index
OSX, -1.06%
losing ground. See Energy Stocks.

Meanwhile, gold futures closed above $575 an ounce for the first time in 25 years and silver prices edged closer to $10 an ounce, to levels not seen since 1984. See Metals Stocks.

Taking a broad measure of the commodity-futures markets, the Reuters/Jefferies CRB Index stood at 348.7 points, down 0.4%, on the New York Board of Trade. It climbed to a record 350.38 in the previous session.

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